Investment projects in challenging markets – assessing the risks in the early stages

Newsletter

Investment projects in challenging markets

29 May 2018

Global

Maritime Security

Hein Baartmans

Investment projects in challenging markets – assessing the risks in the early stages

Entering a new market or taking on a new project is often challenging. It is not simply a question of being able to complete the project, but one of delivering genuine growth for the business and mitigating any potential risks you might encounter. Questions to consider include: What is the financial aim of the project? Might we encounter corruption along the way that could see us run the risk of legal action? Can our people operate safely throughout the project?

Navigating your way through the lifecycle of an investment can be potentially hazardous. There are critical risk factors to manage at each stage. From identification of the opportunity, to investment appraisal and due diligence partner screening, to implementation, project completion and financial monitoring – planning and mitigating at critical risk points can ensure the success of the project and also maximise the opportunity.

Developing critical local market knowledge in the early stages of an investment

The most successful projects are those that start with a solid investment appraisal, before any commercial venture is agreed to. Country profiling and market analysis in the initial stages can be a valuable way of deciding whether to say ‘yes’ or ‘no’ to a potential new project. In the maritime industry this would include assessing the threat of piracy, kidnap and other maritime crime, and also risks such as local providers of vessels and political (in)stability in the operations area.

Before signing off on an investment, it is vital that the company understands the geopolitical situation in the region where the project is likely to take place. Businesses in the maritime sector must assess the implications that political turmoil in countries along supply chain routes may have for operations. These routes will regularly span several continents.

For example, prior to investing in any project in the Sea of Azov, companies must not only consider the onshore complexities, but also the legal and reputational implications of operating through the Kerch Strait, which acts as the only point of access for ships entering the sea. Russia has controlled the Kerch Strait since 2014, when it annexed the territory of Crimea from Ukraine. Although the Kerch Commercial Sea Port officially controls the strait, there is an international trade embargo on companies operating in Crimea, and the sea port is under US sanctions. In this case, due diligence on potential suppliers, local partners and collaborating state entities is critical when weighing up investment opportunities. A risk assessment of the geopolitical climate would also be essential, given that an escalation of tensions between Ukraine and Russia could lead to the closure of the Kerch Strait, essentially rendering the Sea of Azov inaccessible.

Due diligence when working with local partners

Where you need to work with local partners, it is essential to have appropriate vetting procedures in place. As Paul Verheul, COO of Van Oord (a leading international contractor specialising in dredging, marine engineering and offshore projects), told Control Risks: “strategic partner selection is critical in the early stages of an investment project, especially when local parties are involved and needed to win tenders”

Many companies like Van Oord often face challenges in navigating local operating environments and business regulations. Building local market knowledge and doing appropriate stakeholder mapping in the early stages are key to avoid any negative surprises down the line. Gathering information from governments, local companies and key players around the sector is paramount to the success of any investment project.

A structured and consistent risk management approach will provide a reliable basis for companies to grow safely, responsibly and profitably. By knowing about the country or region you wish to expand into, you can take appropriate steps to mitigate any risks. Companies that adapt, adopt and improve can be highly successful in complex business environments and will be able to reduce negative or harmful effects during the project lifecycle to a minimum. Combined with the right knowledge and expertise, you can create resilience in your company and the projects that you launch wherever the opportunity takes you.